The existence of debt covenants with restrictions related to cash or working capital increase the risks of material misstatement in cash accounts.

Question

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Debt covenants with restrictions related to cash or working capital may limit a company's ability to use cash for certain purposes or require the company to maintain a certain level of working capital. This can increase the risk that the company will misstate its cash accounts in order to comply with these restrictions. For example, a company may record fictitious sales or delay cash disbursements in order to avoid violating a debt covenant. Therefore, the existence of debt covenants with these restrictions increases the risk of material misstatement in cash accounts.

The Existence of Debt Covenants with Restrictions Related to Cash